SANKYO CO.,LTD. FY2027 Q1 Earnings Report

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Executive Summary

Although the first quarter of the fiscal year ending March 2027 recorded substantial declines in revenue and earnings, profitability remained high relative to the industry average, with an operating margin of 31.3% and a net profit margin of 24.1%. Revenue was ¥33.57B (¥55.19B in the same period of the previous year, YoY -39.2%), operating income was ¥10.50B (¥23.85B, YoY -56.0%), ordinary income was ¥11.11B (¥24.39B, YoY -54.5%), and net income was ¥8.07B (¥17.45B, YoY -53.7%). The primary cause of the decline in revenue and earnings was lower sales in the core pachinko machine-related and pachislot machine-related businesses. Selling, general and administrative expenses, which have a strong fixed-cost component, did not decline in line with revenue and pressured margins. Progress against the full-year plan was 19.3% for revenue and 18.7% for operating income, both below the simple progress benchmark of 25%, indicating that the sales plan is premised on a back-loaded second half.

Factors Affecting Business Performance

【Revenue】Revenue was ¥33.57B, representing a 39.2% year-on-year decline. The core pachinko machine-related business, accounting for 66.1% of the sales mix, recorded revenue of ¥22.20B, down 39.5% YoY, while the pachislot machine-related business, accounting for 24.6%, recorded revenue of ¥8.27B, down 45.0% YoY. Both core segments declined substantially. The supply equipment-related business recorded revenue of ¥2.99B, down 10.2% YoY, representing a relatively smaller decline. The decrease in revenue appears to have resulted from shifts in the timing of shipments of core products and the launch of new models between fiscal periods.

【Profit and Loss】The gross margin was 60.4%, down 103bp from 61.4% in the previous year, while the cost-of-sales ratio also increased. SG&A expenses were ¥9.78B, down only 2.7% year on year, failing to keep pace with the decline in revenue. Consequently, the SG&A ratio rose by 1,093bp to 29.1% from 18.2% in the previous year. As a result, the operating margin contracted by 1,195bp to 31.3% from 43.2% in the previous year, and the decline in operating income (-56.0%) exceeded the decline in revenue (-39.2%). Non-operating income was limited to ¥0.61B, including ¥0.31B in dividend income, and no extraordinary gains or losses were recorded. The ordinary income margin was 33.1%. After deducting income taxes and other taxes of ¥3.03B (effective tax rate of 27.3%) from pretax income of ¥11.11B, net income was ¥8.07B. The decline in revenue and earnings indicates that the dilution of fixed costs, or the negative reversal of operating leverage, was the primary cause of the margin contraction.

Segment Analysis

The pachinko machine-related business was the largest segment, with revenue of ¥22.20B (66.1% of the sales mix, YoY -39.5%), operating income of ¥9.02B (YoY -48.9%), and a margin of 40.6%. The pachislot machine-related business recorded revenue of ¥8.27B (24.6% of the sales mix, YoY -45.0%), operating income of ¥2.94B (YoY -61.7%), and a margin of 35.6%; earnings declined more sharply than revenue, resulting in deteriorating profitability. The supply equipment-related business recorded revenue of ¥2.99B (8.9% of the sales mix, YoY -10.2%), operating income of ¥0.18B (YoY -24.9%), and a margin of 5.8%, remaining a lower-margin business than the other segments. Consolidated operating income was ¥10.50B after deducting adjustments of -¥1.68B, including administrative expenses and other items, from total segment income of ¥12.17B. The two core segments account for more than 90% of total revenue, and the cycle of new pachinko and pachislot machine launches is the primary driver of fluctuations in business performance.

Key Financial Metrics

【Profitability】The operating margin was 31.3% (43.2% in the previous year), while the net profit margin was 24.1% (31.6% in the previous year). Both declined from the previous year but remained at high levels. 【Cash Flow Quality】Comprehensive income was ¥7.93B, a difference of only -¥0.14B from net income of ¥8.07B. The primary factors were an unrealized valuation difference on other securities of -¥0.13B and adjustments related to retirement benefits of -¥0.02B. The difference was small, and earnings quality can generally be considered sound. 【Investment Efficiency】ROE was 3.2% (quarterly result; approximately 7.0% in the same period of the previous year), primarily due to the contraction in the net profit margin and a decline in total asset turnover accompanying the decrease in revenue. 【Financial Soundness】The equity ratio was 86.6%, and the current ratio was approximately 794.6% (current assets of ¥229.89B / current liabilities of ¥28.93B), both extremely high. The Company continues to maintain a financial structure with low dependence on interest-bearing debt.

Cash Flow Analysis

Because cash flow statement data has not been disclosed, trends in funds can be assessed based on changes in the balance sheet. Cash and deposits were ¥112.67B, down ¥19.79B (-14.9%) from ¥132.46B in the same period of the previous year, while short-term securities remained largely flat at ¥59.97B. The decline appears to have been driven by the increasing amount of funds tied up in working capital, as accounts receivable increased by ¥10.66B (+220.6%) and inventories increased by ¥1.54B (+101.8%). Accounts payable also increased by ¥5.60B (+72.1%), suggesting that part of the cash outflow was offset through the use of supplier payment terms. Cash and deposits plus short-term securities remained substantial at more than ¥170B, indicating that financial flexibility has been maintained even as working capital increased.

Earnings Quality

Current-period earnings were primarily driven by operating income of ¥10.496B. The contribution from non-operating income of ¥0.61B, including dividend income of ¥0.31B and interest income of ¥0.14B, among other items, was limited to approximately 1.8% of revenue. No extraordinary gains or losses were recorded, indicating that recurring operating earnings accounted for the majority of profit. The difference between ordinary income of ¥11.11B and net income of ¥8.07B was primarily attributable to income taxes and other taxes of ¥3.03B (effective tax rate of 27.3%). The tax burden was largely unchanged from the previous year (effective tax rate of approximately 28.5%), and the difference remained within a reasonable range. Comprehensive income of ¥7.93B was almost equal to net income, indicating limited impact from valuation-related items such as valuation differences on other securities and adjustments related to retirement benefits. However, despite the decline in revenue, accounts receivable and inventories increased substantially. The trend in accruals—the difference between accrual-based earnings and cash collection—will therefore require monitoring going forward.

Earnings Forecasts and Guidance

First-quarter progress against the full-year plan—revenue of ¥174.00B, operating income of ¥56.00B, ordinary income of ¥58.00B, and net income of ¥40.00B—was 19.3% for revenue, 18.7% for operating income, 19.2% for ordinary income, and 20.2% for net income. All were below the 25% benchmark for evenly distributed quarterly progress, suggesting that the plan incorporates a concentration of new model launches and shipments in the second half. No revision to the earnings forecast was made during the quarter, although the dividend forecast was revised. Given the fixed-cost nature of SG&A expenses, operating leverage could provide room for margin improvement if shipments recover in the second half. However, if the delay in progress continues, achievement of the full-year plan will become a key focus.

Shareholder Returns

The full-year dividend forecast is ¥100 per share, implying a payout ratio of approximately 49.4% against projected full-year EPS of ¥202.52. Although the dividend forecast was revised during the quarter, the earnings forecast itself remained unchanged. Investors should note that this represents a revision to the dividend plan without accompanying earnings growth. Given the Company’s ample financial resources, including an equity ratio of 86.6% and cash and deposits of ¥112.67B, a payout ratio of approximately 49% is considered within its financial capacity. No share repurchase activity was disclosed, and shareholder returns are assessed solely based on dividends.

Risk Factors

1. Business concentration risk: The pachinko machine-related business accounts for 66.1% of the sales mix, while pachinko and pachislot machines combined account for more than 90% of revenue. The Company has a high degree of dependence on specific product categories, and changes in regulatory trends or the willingness of amusement halls to invest could have a significant impact on business performance.

2. Sales cycle volatility risk: In the pachislot machine-related business, operating income declined 61.7% YoY, exceeding the 45.0% YoY decline in revenue. The business has a high dependence on the timing of new model launches, resulting in substantial quarterly fluctuations in performance.

3. Credit and inventory risk associated with increased working capital: Accounts receivable increased substantially by 220.6% year on year (+¥10.66B), while inventories increased 101.8% (+¥1.54B). Accounts payable also increased 72.1% (+¥5.60B), providing some offset, but collection trends and the risk of inventory obsolescence require ongoing monitoring.

Industry Benchmark (For Reference; Company Analysis)

Profitability and Returns

Despite being in a period of declining earnings, both the operating margin and net profit margin substantially exceeded the manufacturing industry median, placing the Company’s profitability among the highest in the industry.

Growth and Capital Efficiency

The revenue growth rate was substantially below the industry median, placing the Company at a disadvantage within the industry in terms of growth during the current period.

※Source: Compiled by the Company

Key Takeaways from the Earnings Report

1. Even amid a substantial decline in revenue and earnings, the Company maintained an operating margin of 31.3%, exceeding the industry median of 8.7% by +22.6pt. This profitability structure is noteworthy in evaluating the quality of its cost structure.

2. Full-year progress was 19.3% for revenue and 18.7% for operating income, below the simple progress benchmark. Whether the back-loaded plan can be achieved will be a key point to verify in future earnings data.

3. Against a robust financial foundation, with an equity ratio of 86.6% and a current ratio of approximately 794.6%, the Company simultaneously experienced substantial increases in accounts receivable and inventories. The quality of the earnings report should therefore be assessed from both perspectives: high profitability and changes in working capital efficiency.

Theoretical Share Price (Reference Value)

This is a mechanically calculated reference range based solely on publicly disclosed data using a residual income model (Ohlson-type model with an explicit 5-year fade). It is not a forecast of the market share price or a recommendation of any specific investment action.

Sensitivity: ¥1,512–¥1,599 at ±1% for the cost of equity, and ¥1,548–¥1,565 at ±0.1 for ω.

Notes:

• Net assets as of the end of the quarter are used (there is a timing difference relative to the full-year forecast).
• Because net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Calculation model: Residual income model / Interest rate reference month: 2026-07 / This value does not forecast or guarantee the future share price)

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This report is an earnings analysis document automatically generated by AI based on XBRL earnings flash report data. It does not recommend investment in any specific security. The industry benchmarks are reference information compiled by the Company based on publicly disclosed earnings data. Investment decisions should be made at your own responsibility, after consulting a professional as necessary.

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